Istanbul Journal of Economics
Determining Unemployment Hysteresis in European Countries Using Linear and Nonlinear Unit Root Tests: The 1991-2020 PeriodAyça Doğaner
Unemployment is accepted as an important macroeconomic problems in all countries. Due to the unemployment rate being an important variable, it is a priority target in economic policies. In this direction, the issue of how to increase the employment rate and reduce the unemployment rate is included in countries’ short-, medium-, and long-term economic policies of countries. Completely eliminating unemployment is possible. For this reason, hypotheses have been put forward in the literature regarding unemployment. With two basic unemployment theories being found: the unemployment hysteresis hypothesis and the natural rate of unemployment hypothesis. According to the unemployment hysteresis hypothesis, when the actual unemployment rates exceeds the natural unemployment rate due to a shock, unemployment does not return to its previous level once the effects from the shock end. The unemployment time series’ unit root proves the existence of unemployment hysteresis, and the series being stationary process at the level pf unemployment proves the assumption of the natural rate of unemployment. This study determines the precense of unemployment hysteresis in European Union countries using linear and nonlinear unit root tests over annual data for the 1991-2020 period. All tests determined unemployment hysteresis to be present in Luxembourg.
Avrupa Birliği Ülkelerinde İşsizlik Histerisi Hipotezinin Doğrusal ve Doğrusal Olmayan Birim Kök Testleriyle Tespiti: 1991-2020 DönemiAyça Doğaner
İşsizlik tüm ülkelerde önemli makroekonomik sorunlardan birisi olarak kabul edilmektedir. İşsizlik oranlarının önemli bir değişken olması nedeniyle, ekonomi politikalarında öncelikli hedeflerden birisi olarak yer almaktadır. Bu doğrultuda istihdam oranlarının artırılması ile işsizlik oranlarının düşürülmesi hususu ülkelerin kısa, orta ve uzun vadeli ekonomi politikalarında bulunmaktadır. İşsizliğin tamamen ortadan kaldırılması mümkün değildir. Bu nedenle işsizliğe ilişkin literatürde öne sürülmüş bazı hipotezler vardır. İşsizliğe ilişkin işsizlik histerisi hipotezi, doğal oran hipotezi olmak üzere 2 temel teori bulunmaktadır. İşsizlik histerisi hipotezine göre, gerçekleşen bir şok ile fiili işsizlik oranlarının, doğal işsizlik oranlarını aşmasının, şokun etkilerinin sona ermesiyle tekrar eski seviyelerine düşmemektedir. İşsizlik serisinin birim köke sahip olması işsizlik histerisinin varlığını, serinin düzey değerinde durağan olması ise doğal işsizlik oranın varsayımını kanıtlamaktadır. Bu çalışmada, 1991-2020 döneminde yıllık veriler kullanılarak Avrupa Birliği ülkelerinde işsizlik histerisinin olup olmadığı doğrusal ve doğrusal olmayan birim kök testleriyle tespit edilmiştir. Yapılan tüm testlerde Lüksemburg’da işsizlik histerisinin varlığı tespit edilmiştir.
High unemployment rates are accepted as an important macroeconomic problem in all countries. In general, unemployment is the situation when people are willing to work but are unable to find a job. Unemployment rate are an important macroeconomic variable for all countries in the world, are primary goal. In line with this, the issue of reducing unemployment rates by increasing employment is definitely part of countries’ short-, medium-, and long-term economic policies.
When evaluating a general economic situation, completely eliminating unemployment is seen to be impossible. The literature has various studies on unemployment, with two main theories being found: the unemployment hysteresis hypothesis and the natural rate of unemployment hypothesis. Unemployment hysteria and the natural rate of unemployment examine the effects of economic shocks on unemployment series.
A time series that has a unit root, (i.e. is not stationary), can be said to possess a hysteresis effect. Any shock in this situation will cause the unemployment time series to maintain even after the shock wears off. Meanwhile, for time series that do not have a unit root, (i.e. are stationary), the effect of any economic shock will have a temporary effect on the series, with the series returning to its original state once the shock wears off. In the natural rate of unemployment hypothesis, the unemployment rate returns to its previous level in the long run after experiencing an economic shock. In the unemployment hysteresis hypothesis, the unemployment rate does not return to its previous level after the shock.
Unit root tests are widely used to determine whether unemployment hysteresis is present. The aim of this study is to test the unemployment hysteresis hypothesis in EU countries using linear and nonlinear unit root tests. For this purpose, linear analyses were performed on the unemployment rate time series of this countries, and unit root analyses were performed separetely with regard to linear and non-linear series. The linearity of the series showing EU countries’ overall unemployment rate needs to be determined first before determining whether the series is stationary or not. As a result of the linearity tests, linear unit root tests were applied to the series possessing a linear structure. Nonlinear unit root tests were applied to the series possessing a nonlinear structure. Both the linear and nonlinear unit root tests were applied to the series that showed conflicting result regarding the linearity tests. As a result of the research, the Luxembourg unemployment time series was seen to have a unit root for all models. In line with this, when evaluating all the models together, the unemployment rates in Luxembourg can be said to exhibit unemployment hysteresis.
In countries possessing unemployment hysteresis, a shock to the economy is permanent and causes long-term effects. For this reason, active policy implementations are needed. Due to the way unemployment series diverge from the average unemployment rate as a result of an economic shock, studies should be carried out to resolve unemployment issues using various administrative policies. The unemploment rate is also directly related to many macroeconomic variables such as inflation and gross domestic product. Therefore, any instability experienced in the unemployment rate will also upset other economic balances. As a result, increasing the general economic structure’s resilience against internal and external shocks is important for keeping unemployment rates at a specific level.